DOL Announces It Will Not Enforce Fiduciary Rule Pending Review of Fifth Circuit Decision Striking Down Rule

But SEC and the States May Now Step in to Fill the Void

The Department of Labor (“DOL”) announced it will not enforce the Fiduciary Rule pending further review, as the fallout from the Fifth Circuit vacating the Fiduciary Rule continues. The announcement clarifies that the DOL will not enforce the Fiduciary Rule nationwide. Previously, it was not clear whether the Fifth Circuit’s ruling applied only within the States covered by the Fifth Circuit (Louisiana, Mississippi, and Texas) or whether it applied elsewhere. Still, Clients may remain subject to State laws similar to, or modeled after, the Fiduciary Rule. Further, the SEC has scheduled an Open Meeting on April 18 at 3:30 p.m. to discuss whether to adopt an SEC version of the Fiduciary Rule to apply instead of the DOL version.

With the DOL not enforcing the Fiduciary Rule for the time being, clients should focus on the next dates for steps in the legal battle — April 30, May 7, and June 13, 2018. These are the dates for (i) petitioning the Fifth Circuit for a rehearing, (ii) the mandate on the Fifth Circuit’s judgment to issue, and (ii) for filing a Petition for Certiorari to the Supreme Court if there is no petition for rehearing.

The DOL has until April 30, 2018, 45 days after the Fifth Circuit judgment was entered, to file a Petition for Rehearing En Banc. Such a Petition would ask the full slate of 15 active Fifth Circuit Judges to review the March 15, 2018 decision, which was made by a panel of three judges, who split 2-1 in favor of striking down the rule.[1] But a Petition for Rehearing En Banc is unlikely to succeed, since 10 of the 15 active judges on the Fifth Circuit are Republican appointees. The 10 Republican appointees are likely to sympathize with the Panel’s reasoning that the Fiduciary Rule was arbitrary and capricious in seeking to extend ERISA’s “investment advice fiduciary” definition to broker-dealers and insurance agents.[2]

If the DOL does not file a Petition for Rehearing En Banc (or for Panel Rehearing) by April 30, then the mandate of the Fifth Circuit’s decision will go into effect on May 7, 2018 – unless the DOL asks for a stay so it can file a Petition for Certiorari to the Supreme Court. If the DOL seeks Supreme Court review, it has DOL has until June 13, 2018 to file a Petition for Certiorari to obtain Supreme Court review. Alternatively, if the DOL files a Petition for Rehearing En Banc an (as expected) loses, then it will have 90 days from the denial of such a Petition to file a Petition for Certiorari to the Supreme Court.[3]

The DOL will face an uphill battle at the Supreme Court, if the Court even decides to take the case. Five of the nine members of the Supreme Court are Republican nominees who are likely to be sympathetic to the Fifth Circuit’s ruling. These five Justices tend to vote together on the key issues at stake in the Fifth Circuit’s Fiduciary Rule decision: (i) textualist statutory interpretation; and (ii) applying the Chevron doctrine to limit the discretion of administrative agencies. Thus, the Fiduciary Rule’s future is in serious doubt regardless of the next step.

At the same time, Clients should note that the Fifth Circuit ruling may have spurred the SEC to adopt its own version of the Fiduciary Rule to fill the void. On April 11, 2018, the SEC publicly announced its first Open Meeting to discuss whether to adopt its own, perhaps more moderate, version of the Fiduciary Rule. The topics for this meeting are the same as the focus of the DOL Fiduciary Rule, including (a) “whether to propose a rule to establish a standard of conduct for broker-dealers” and “associated persons,” in recommending investments, and (b) “whether to propose a Commission interpretation of the standard of conduct for investment advisers.” The Open Meeting will take place on April 18, 2018 at 3:30 p.m. at the SEC’s Washington, D.C. headquarters, and will be webcast on the SEC website at www.sec.gov. This follows SEC Chairman Jay Clayton’s recent statement that he is looking forward to getting an SEC proposal addressing these issues “out the door.”

Further, Clients still need to ensure they are complying with relevant State laws, including regulations that are based on, or are similar to, the federal Fiduciary Rule. For example, the Massachusetts Securities Division recently brought an action against Scottrade, Inc. alleging violations of State law based on conduct that violated internal policies aimed at complying with the Fiduciary Rule.[4] And New York, Connecticut, New Jersey and Nevada have passed laws or proposed regulations that mirror the Fiduciary Rule’s requirements.[5] The Fifth Circuit’s decision and DOL’s no-enforcement announcement may cause State regulators to become more active in this area.

In sum, the DOL has publicly clarified that the Fiduciary Rule will not be enforced for the time being, pending further review of the Fifth Circuit’s decision striking it down. This clarifies that the Fifth Circuit’s decision has a nationwide impact stopping the Fiduciary Rule in its tracks. At the same time, broker-dealers, investment advisers and other Clients should keep in mind that State laws with similar requirements to the Fiduciary Rule may still apply to their business. Thus, we urge Clients to actively consult with counsel to monitor the status of the Fifth Circuit case and the DOL and SEC’s ongoing position, and to analyze the application of comparable State laws.

If you have any questions about this Alert, please contact Sam Lieberman at (212) 573-8164.

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  1. Chamber of Commerce v. Dept. of Labor, — F.3d —-, 2018 WL 1325019, (5th Cir. Mar. 15, 2018).

  2. 2018 WL 1325019, at *12, *16. [3]If the DOL files a Petition for Rehearing En Banc, the 7-day period for the mandate also runs from the denial of a Rehearing. This can add several months until the decision becomes final.

  3. If the DOL files a Petition for Rehearing En Banc, the 7-day period for the mandate also runs from the denial of a Rehearing. This can add several months until the decision becomes final.

  4. In the Matter of Scottrade, Inc., No. E-2017-0045 (Mass. Sec. Div., Feb. 15, 2018).

  5. ”States Jump on Fiduciary Rule Enforcement Even as Reg. Gets Review,” (Bloomberg BNA, Feb. 23, 2018), available at https://www.bna.com/states-jump-fiduciary-n57982089159/